The industrial real estate sector has experienced unparalleled growth over the past several years. While other real estate sectors have experienced fluctuations in demand over the past decade, the industrial sector has maintained sustained expansion.
Recent geopolitical events combined with economic trends bolster the continuing case for the growth of the industrial real estate sector. How will these trends impact industrial development in light of the changing global supply chain and labor market trends? We believe that these secular trends will continue to fuel the demand for industrial real estate.
Shortening the chain
While the explosive growth and continued demand for e-commerce has been an important catalyst in driving new industrial development, the more significant influence on industrial growth moving forward may be the reshoring trend and corresponding shifts in the global supply chain. A series of market disruptions have revealed the vulnerabilities of overseas supply chains—and the costs that come with them. From economic shocks to pandemic shortages, supply chain disruptions have demonstrated the limits of just-in-time inventory strategies and prompted manufacturers to look for new strategies to mitigate the costs and consequences of future supply chain challenges. Foremost among those is reshoring, according to the National Institute of Standards and Technology, 70% of manufacturers are considering reshoring operations in the coming years. Furthermore, the heightened trend of companies’ reshoring is evidenced by the increased mentions of reshoring on the Bank of America U.S. earnings call. According to AlphaSense data, in 2021, jobs tied to reshoring activity increased to a record high of almost 180,000 jobs, representing a 1.4% lift to the total U.S. manufacturing labor force, and as of Q1 2022, shows 73,786 reshoring job announcements across 281 companies. This suggests the sustained momentum of reshoring across companies remains strong, even as the COVID pandemic slows.1
Companies across the logistics and manufacturing spectrum are concluding that the cost calculus involved in reshoring weighs heavily towards developing supply chains located in the United States to serve their central consumer base. As result of these trends, we are observing more manufacturers, industrial owners, and operators embracing the concepts of enhanced manufacturing facilities with heavy investment in automation, flex space in certain situations, and other design considerations intended to allow users to adapt to future labor and technology trends. These factors have caused users to increase their facility footprint with many new facilities averaging between 500,000 and 1 million square feet.
The market has experienced a period of sustained inflation for the first time in 40 years. High levels of inflation have historically correlated to near-record low levels of consumer confidence considering the declining value of the consumer dollar. The Fed’s response and recent market metrics suggest that we may experience a near-term recession while the market addresses the perceived causes of the inflationary environment. However, we believe that any recession will have a nominal impact on the continuing demand for industrial real estate. First, industrial users across the spectrum of manufacturing and logistics continue to focus on occupying new facilities built to the specifications of the user’s labor and technology needs. We believe that the dearth of modern facilities will continue to fuel the demand for new industrial facilities to address supply chain challenges and changing labor demographics. Second, we view any economic downturn as a moment when companies will gravitate towards triple net lease build-to-suit financing arrangements that allow companies to meet their mission critical facilities needs while still preserving capital. Third, the U.S. consumer has proven to be extremely resilient throughout multiple economic cycles and we expect continued consumer spending to further enhance the need for users to occupy new build-to-suit industrial facilities.
From a broader market perspective, those players who have proven track records and deep relationships across the industrial real estate spectrum (developers, tenants, banks) are best positioned to fuel the continued growth of the sector throughout any downturn. These equity sources have honed their strategies and approach through multiple economic cycles and are less reliant on the short-term fluctuations in interest rates given their long-standing relationships with financing sources.
Changing labor demographics remain a complex challenge for industrial operators and are shaping the new generation of industrial facilitates. Labor demographics influence not only the location of industrial facilities but also the complexity of the facilities themselves. Users have sought further automation to address the changing labor force.
A recent report detailed that warehouse labor accounts for approximately a quarter of the operating budget for manufacturers.2 While non-supervisory U.S. warehouse labor grew by more than half a million between 2019 and 2021, an additional 140,000 warehouse employees will be needed to operate newly delivered facilities in just the next two years alone. And, as such, even small fluctuations in wages have a significant impact on a company’s bottom line. Recently, labor pressures have rippled across the industry, prompting big names like Walmart and FedEx to announce hefty wage increases and expanded benefits to remain competitive.3
It is not surprising that industrial tenants are viewing future expansion decisions through the prism of a changing labor market. Labor considerations combined with transportation costs have led many users to gravitate toward occupying new facilities in markets with labor availability, low labor costs, and central transportation hubs.
We remain steadfast in our belief that the industrial sector will continue to experience growth due to the factors above.
2 Source: Bureau of Labor Statistics as of August 22, 2022
3 Source: Prologis as of August 22, 2022